Optical networking companies Oclaro (NASDAQ: OCLR) and Infinera (NASDAQ: INFN) obviously has a lot in common, but they are also two ships passing in the night right now. One of these companies looks far healthier than the other at first glance, but their stocks are actually suitable for very different investing strategies.
What's the difference?
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First, let's clarify how these companies address different layers of the optical networking market.
Oclaro makes optical modules and components, which other companies use to build fiber-optic networking equipment. The company's largest customers include Cisco Systems (NASDAQ: CSCO) and Huawei, two of the largest makers of network routers in the world.
The companies do have a working relationship. Oclaro calls Infinera a "top-tier customer." The component specialist's products are part of Infinera's optical routers designed to power long-range networks. This company's customer list focuses on telecoms, cable broadcasters, and enterprise-class companies with massive data center networks. When Netflix (NASDAQ: NFLX) wanted a simple but powerful networking platform for its Open Connect content delivery network, it picked the Infinera Cloud Xpress 2 router to get the job done.
So Infinera stands one step closer to the consumer than Oclaro in the fiber-optic food chain. They both crave a macro trend toward more and faster networking around the world, just from slightly different angles. Oclaro is more diversified, while Infinera has a sharper focus on key markets and customers.
By the numbers
Here's how the two companies compare from a purely financial point of view today:
The two contenders play in the same revenue league, but Oclaro is currently far more profitable. That company tends to buy back shares on a regular basis, but Infinera sells more stock when it needs to raise cash. From a financial perspective, Oclaro is much easier to love.
It wasn't always like this. Infinera's fortunes have waned in recent years, while Oclaro is headed in the opposite direction:
How to pick a winner
Oclaro is the easy choice to make here, thanks to strongly positive market trends and a pristinely profitable business model. If you're looking for a low-risk way to invest in the optical networking market, this would be the sensible choice.
But Infinera has its place in some investing strategies. While Oclaro is dipping into the enterprise markets, Infinera is biding its time until the next big push for long-range infrastructure investments rolls around. There are several of these on tap, just not necessarily right around the corner.
- 5G wireless network towers will require plenty of fiber-optic connectivity over the next three to five years.
- The cable industry is dragging its feet on upgrades to the DOCSIS 3.1 standard, which can squeeze much more bandwidth out of the same coaxial cables used in DOCSIS 3.0. Again, fiber networks will be needed to connect that last-mile solution to the internet backbone.
- Both of these upcoming infrastructure pushes play right into Infinera's core operations.
If Infinera can weather the current market lull, the stock will be spring-loaded for an impressive rebound when these growth drivers start to kick in. Oclaro will benefit from the same trends, but its investment returns will start from a stronger base price and have less room for extreme jumps.
So I like both stocks, but for different reasons. Which optical networking specialist you choose to invest in should depend on your risk tolerance and your level of patience while waiting for the next round of infrastructure upgrades.
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